Keynesian models of unemployment

Why is there persistant unemployment?This question is as relevant today as when it was first posed over forty years ago.Since then Keynes and his followers have provided an answer, of sorts, in the theory of effective demand.The standard textbook Keynesian model shows how the level of unemploy- ment is determined given a fixed level of the nominal wage and the money stock.But why is the nominal wage fixed?The textbook answer is that it is institutionally fixed, or that workers suffer from money illusion.Such answers seem unsatisfying to economists who would like to explain such wage stickiness in terms of rational behavior.Six years ago the path breaking volume of Phelps, et al. ( ) appeared and attempted to provide ex- planations of wage (and price) stickiness in terms of optimizing behavior of individual agents.Since then, there have been many other contributions to the microfoundations of macroeconomics.In this paper I will survey a few recent contributions to the theory of unemployment, and provide some simple algebraic examples of models to explain wage stickiness.Many of the original papers presented partial equilibrium models, but here I will always close up the models by requiring that the out- put market clear.It will become clear that this requirement itself tends to determine the level of unemployment.The micro-models of the labor market serve only to determine the level of wages .The emphasis throughout will be on presenting simple theoretical models.Emphasizing simplicity rather than realism helps to clarify the nature of the Keynesian Unemployment